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Receiving Compensation as a Corporate Director?
Chris W. Strand, MST, CPA/PFS
Principal, Tax Practice; Director of High Net Worth Services
June 7, 2010
Common practice in Washington has held that a corporate director is not engaged in a business when serving as a member of a board. As a result, the compensation the director receives for serving on the corporate board has not been considered subject to the state's business and occupation (B&O) tax.
This spring, the Washington legislature concluded that corporate directors are, in fact, independent contractors engaged in a business―thus making certain director's fees subject to B&O tax.
Effective July 1, 2010, corporate directors must pay Washington B&O tax on the gross amount of compensation they receive for their services as board members. However, those who have paid B&O taxes on director's fees before this effective date are not entitled to a refund, based on the premise that the rules do not create a new category of taxable income but rather resolve a previous misunderstanding.
Directors Subject to Tax
Under the new law's apportionment provisions, Washington's B&O tax on director's fees generally applies to the members of the board of directors of a corporation that is headquartered or based in Washington State--regardless of the state where the corporation is officially organized or the meeting is held.
Directors should not be subject to B&O tax on fees from corporations headquartered or based outside of Washington.
Amount Subject to Tax
As a practical matter, a director who receives more than $12,000 in compensation subject to the B&O tax must register with the Washington State Department of Revenue and pay the B&O tax on a monthly, quarterly or annual basis, depending on the estimated tax liability.
The amount of director's fees subject to tax includes all cash and noncash compensation and expense reimbursements that are received for service on the corporation's board of directors. Noncash compensation includes stock options and other stock-based compensation, although the regulations to determine the exact manner of implementation have yet to be developed.
The B&O tax is levied on gross income. No deductions are allowed.
B&O Tax Rate
Director's fees are subject to Washington B&O tax on services, levied at the rate of 1.8 percent of gross income. This rate includes a temporary increase of 0.3 percent. The rate is scheduled to return to 1.5 percent after June 20, 2013.
Small Business Tax Credit
Directors subject to the state's B&O tax may qualify for the small business tax credit, which phases out based on the amount of the tax liability.
Calculated at current rates, the credit essentially eliminates the B&O tax for directors who receive less than $46,667 per year and reduces the tax for those who receive between $46,667 and $93,333 per year. Directors who earn more than $93,333 per year are not eligible for the credit.
Nonresident Corporate Directors
Under the new legislation, directors can be subject to the B&O tax even if they aren't Washington residents.
A person is considered to have substantial nexus, or connection, with Washington―and thus be subject to the state's B&O tax on director's fees―if the person either resides in Washington or resides elsewhere and meets any of the following requirements:
 owns property in Washington State that is worth more than $50,000
has gross receipts attributable to Washington of more than $250,000
has at least 25 percent of his or her total gross receipts for services (including director's compensation) attributable to Washington
Significantly, persons with substantial nexus in any tax year are considered to also have substantial nexus for the following tax year.
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